TOP 10 CHALLENGES FOR INVESTMENT BANKS 2016

Digital Disruption:
Embracing an integrated digital ecosystem

Challenge 08

Introduction

Investment banking firms are under pressure from all sides.

Non-traditional competitors are entering high-margin areas, such as capital raising and advisory services, while other services face continued
commoditization and competitive threats from lower-cost providers. The recent era of cost-cutting, using traditional approaches, has reached the
point of diminishing returns, and many established firms still carry the burden of complex, often inflexible operating and technology platforms
that make innovation difficult (see Challenge 2: Investment Banking Technology: Jettisoning Legacy Architectures).

Investment banking was once characterized by high barriers to entry, but many of these hurdles have been lowered. As the consumerization of
technology continues, flexible sourcing of people, infrastructure, software and information—through the use of cloud computing and “everything
as a service” (XaaS)—has converged with new design, development and deployment approaches and tools. Once estimated at $5 million, the
cost of launching a tech startup has been dropping steadily to just $5,000 in 2011—and is likely even lower today. A recent
MIT/NBER study noted that organizations that support regional accelerator programs can now provide meaningful funding and assistance to
their startup portfolio companies with a seed investment or stipend as low as $15,000.1

THE COST OF LAUNCHING A TECH STARTUP HAS DROPPED DRAMATICALLY

NUMBER OF INVESTMENT ROUNDS IN FINTECH COMPANIES IN NEW YORK

SPECIFIC STEPS FOR INVESTMENT BANKS

A FUEL IN RESURGENCE

Other players—such as asset managers and hedge funds–that have their
own platforms and the desire to expand into investment banking also
face reduced costs. The lowering of these barriers is helping to fuel a
resurgence in innovation, with client emphasis driving new thinking and
the biggest ideas originating from unexpected places.

Cost and complexity—once sources of competitive advantage—now serve
as encumbrances, making traditional players seem antiquated and
arbitrarily complex. Scale and global reach have become de facto
commodities, and information and liquidity are no longer constrained.
The central investment banking concept is changing and a new digital
ecosystem is emerging. Innovative firms are rushing to capitalize on
opportunities to better serve clients and partnering to better manage
cost and risk.

NUMBER OF FINTECH DEALS IN NEW YORK,
BY SEGMENT

THE INNOVATION IMPERATIVE

Investment banking used to be a highly innovative industry, but cost
reduction, compliance and restructuring have trumped the
development of new client-centric ideas in recent years. Years of
cost-cutting have weakened the structures and the culture that once
encouraged innovation. Technological and entrepreneurial talent have
recognized this stagnation and begun turning to other industries.
Continued regulatory pressure and the massive sunk costs of legacy
systems also serve as barriers to innovation.

Companies such as Google, Facebook and Uber are attracting top
talent (see Challenge 1: Workforce of the Future: Dealing with
Business Change and the Millennial Challenge) and entering new
businesses. Similarly, financial services firms outside the investment
banking realm, including Vanguard and BlackRock, are gaining a
reputation for developing innovative products, both on their own and in
partnership with others.1 Investment banks must either shape the
emerging digital ecosystem, or risk being shaped by it.

Investment banks can therefore no longer afford to operate from
behind fortress walls. Their future success will depend upon external
collaborations that improve business operations, particularly those
that introduce systems to support new products and better customer
service. Eventually, investment banking firms should be in a position to
not only participate in their clients’ digital ecosystems, but also
manage and direct their own—drawing on skills and resources that
would be impossible to replicate internally in a cost-effective and
timely way.

Changing Nature of technology providers

Investment banks should also note the changing nature of the
industry’s technology providers. Varying in size, many of these
providers no longer see themselves as developing enabling
technologies, but rather as helping to define and satisfy end-client
expectations related to service delivery and overall customer
experience. Firms like CAN Capital, Motif, and Funding Circle (among
others) are demonstrating that technology and experience-led
innovation are not limited to the retail space. These types of providers
are creating competitive offers that challenge aspects of investment
banking and push other players in the ecosystem to innovate.

They have access to deep talent pools and attract many of the most
promising new entrants to the technology field. New techniques and
technologies let them innovate and scale quickly at minimal cost.

To take advantage of these developments, investment banks must
embrace participation in digital ecosystems and begin to forge
ecosystems of their own. This shift in thinking represents a
fundamental leap “back to the future”—to a time when innovation was
institutionalized, the battle for talent was being fought (and won),
business and technology architectures were open, and collaboration
and utilities reigned.

SPECIFIC STEPS FOR INVESTMENT BANKS

Redefine clients, value propositions and roles in the
ecosystem.

Investment banks need a clear, up-to-date picture of
the clients they want to serve and the services they want to
deliver to those clients. They must understand how value is
derived in order to identify areas for investing, partnering and
leveraging third-party innovations. Taking advantage of the
ecosystem—particularly in the areas of design and experience—to
bring valued information, products and ideas to clients is essential
to a winning strategy. Banks must clearly define their role in the
new ecosystem, collaborating with partners to achieve scale and
pace and try to relegate non-core functions to other ecosystem
participants when appropriate.

Embrace modern architectural principles and concepts.

The design of all future products, services and platforms must be
experience-driven, service-oriented, collaborative and
cloud-based. Micro-services architecture, development operations
(DevOps) and XaaS, should no longer be considered technical
jargon, but fundamental to the business and technology
vocabulary of the investment banking industry.

An external
perspective can help investment banks initiate cultural change.
That may involve adding individuals with a track record of digital
success to the board of directors, establishing an internal growth
council, setting up a “seed fund” and an incubator to cultivate
promising digital opportunities, and forming closer ties with the
venture capital community.

Conclusion

Establishing momentum is an important element of any successful
change journey, but it is particularly critical when tackling digital
innovation and ecosystem development. It is an opportunity to
demonstrate early results and gain recognition for a willingness to
innovate and experiment. Investment banks could jumpstart ecosystem
development by acquiring businesses (particularly high-potential tech
startups), investing in greenfield ventures that emphasize new client
categories or banking capabilities, and forming joint ventures. In
addition to identifying and exploring areas of “white space” with high
potential for returns, banks should look to establish pace, momentum
and a reputation for forward-looking investment.

The move to an integrated digital ecosystem is not an option for
investment banks—it is an imperative. The nature of each ecosystem
will depend on the customers, capabilities and value proposition of
each firm. Successful firms will be willing to unbundle their current
offerings and combine financial expertise with digital sophistication to
create new ways to deliver value to customers and differentiate
themselves from less adept competitors.

This content has been prepared by Accenture and is for information purposes. No part of this content may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice.

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